Company Overview: Teradyne, Inc. (NASDAQ: TER) is headquartered in North Reading, Massachusetts. The company is a worldwide supplier of automation equipment for test and industrial applications. It is involved in designing, manufacturing, and selling automatic test systems, which is utilized to test semiconductors, complex electronics systems, wireless products, and data storage in different industries.

TER Details

TER Rides on Improving Global Semiconductor Test Markets: Teradyne Inc. (NASDAQ: TER) is engaged in offering automated test equipment solutions and is mainly centred around the semiconductor test market, which generates most of its revenues. The company is also involved in offering specific system testing equipment for certain end markets. The company has four reportable segments, namely (1) semiconductor Test, (2) Industrial Automation, (3) System Test and (4) Wireless Test business. The company remains on track to leverage its capabilities in semiconductor testing systems to expand its footprint into system testing for hard disk military or aerospace composition, printed circuit boards and automotive system analysis.

Looking at the past years, starting from FY16 to FY20, the company has reported a revenue CAGR of 14.6%. Also, the company witnessed a CAGR of 32.3% in its non-GAAP EPS over the period of FY16 - FY20. Bolstering test demand, improving the performance of Universal Robots, along with constant progress in automotive-related semiconductor test shipments remain major tailwinds. After strong 4QFY20 results, the company expects to enter FY21 with a record level of sales and profits led by persistent robust test demand and bounce back in automotive associated semiconductor test shipments. It is worth mentioning that the company has declared a quarterly dividend of $0.10 per share, payable on March 19, 2021 to shareholders. The management has also approved a share repurchase program worth $2 billion and anticipates repurchasing at least $600 million of its common stock in FY21.

Key Trends to Watch Out (Source: Company Reports) 

Thanks to the continuous rise in 5G infrastructure, strong networking, bolstering of mobility, and growing memory test spending, the company’s semiconductor Test revenues got a boost in 4QFY20. The company expects to see an improvement in its Industrial Automation business in the days ahead, owing to improving worldwide manufacturing conditions and new products. Further, the company’s top-line is expected to get a boost from better-than-expected System on a Chip (SOC) test shipments propelled by enhanced demand for mobility-linked test capacity. Notably, the company opines its revenues to be positively impacted, given the increasing complexity of processors and technologies, mounting demand for millimetres wave test capabilities, popularity of its products, and determined design wins.

4QFY20 Key Financial Highlights: During the quarter, the company reported earnings of $1.10 per share, which went up 25% from the prior corresponding period. The company reported revenues of $759 million, up 16% on a year over year basis. The increase in the top-line can primarily be attributed to robust industrial automation shipments during the quarter.  Moreover, encouraging contributions from the Universal Robots acquisition aided the top-line performance. Coming to the segmental details, the company reported $524 million revenues from Semiconductor Test platforms, which accounted for 69% of total revenues. Revenues from System Test business came in at $104 million and was 14% of its 4QFY20 revenues. The company reported $92 million and $40 million of revenues from Industrial Automation and Wireless Test business, respectively.

During the quarter, the company reported pro-forma gross margin of 59.3%, up 80 basis points (bps) year over year. Total operating expenses increased ~1.9% in 4QFY20 and came in at $215.7 million. Operating margin for the quarter increased a whopping 230 bps and came in at 29.7%.

4QFY20 Key Results (Source: Company Reports)

Liquidity & Balance Sheet Details: The company exited the quarter with a cash balance of $1.44 billion (as of December 31, 2020), up from the previous quarter figure of $1.23 billion. Total debt at the end of the quarter came in at $410.1 million. During the quarter, the company recorded net cash flow from operating activities of $260.4 million. In FY20, Gross, EBITDA and net margins stood at 57.2%, 33.4% and 25.1%, higher than the industry median of 50.8%, 19.8% and 10.7%, respectively. In FY20, ROE stood at 42.5%, higher than the industry median of 12.1%. Current ratio of the company stood at 3.45x, higher than the industry median of 3.17x. Debt to equity ratio in the same time span stood at 0.19x, lower than the industry median of 0.34x.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 41.9% of the total shareholdings, while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 11.46% and 5.98%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: On the flip side, softness in a few end markets where the company operates might be a headwind, going forward. The company is also governed by certain U.S. laws and regulations that might limit the export of certain products and services, which, in turn, may lead to the loss of potential customers. The company’s business, financial and operating conditions highly depend on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. Further, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Also, the company is exposed to risks relating to foreign operations that are required to be addressed from time to time. The company also faces stiff competition from peers, which adds to the woes.

Outlook: For 1QFY21, the company expects revenues to be in the range of $720-$780 million. Non-GAAP earnings for the coming quarter is expected to be in the ambit of $0.95-$1.11 per share for 1QFY21. As per the company’s report, SOC market is expected to show a CAGR of 8% (2015-2021E), whereas the memory market is expected to witness a CAGR of 11% over the same time span. Improving global Semiconductor Test Markets are expected to aid the company’s financial performance, going forward.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~17.5%. The stock made a 52-week low and high of $42.87 and $147.9, respectively. On the technical analysis front, the stock has a support level of ~$105.2 and a resistance level of ~$133.29. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer’s median, considering the robust results for 4QFY20, resilient business, improving global semiconductor Test Markets, and growth prospects. We have taken peers like Cohu Inc (NASDAQ: COHU), Keysight Technologies Inc (NYSE: KEYS), to name a few.  Considering the company’s decent 4QFY20 performance, geographical expansion, decent outlook and liquidity position and valuation, we give a “Buy” recommendation on the stock at the closing price of $117.47, up by 0.1% on 17 March 2021.  

TER Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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